* Portugal, Italy lead fall in yields on first trading day
* Risk appetite boosted by upbeat PMI data
* European stocks hit one-year high
* German Bund yields touch eight-week low
(Updates with move in Spanish yields)
By Dhara Ranasinghe
LONDON, Jan 2 Borrowing costs in southern Europe
fell to multi-week lows on Monday after strong manufacturing
data and a rally in stock markets lifted appetite for
lower-rated euro zone bonds.
Italy and Portugal were among the poorest performing bond
markets in the euro zone last year, with annual yields rising
for the first time since a 2011 debt crisis in the bloc on
investor concerns over banks, fiscal policy and political
But with data on Monday showing that factories in the region
ramped up activity in December at the fastest pace in over five
years, appetite for riskier assets received a lift.
Euro zone stocks climbed to their highest level in over a
year, while southern Europe led a fall in government bond
Portugal's 10-year government bond yield fell as much as 10
basis points to its lowest level for almost four weeks at 3.68
Italian and Spanish bond yields fell a similar amount to
their lowest levels in about eight weeks at 1.72 percent
and 1.31 percent respectively.
Spanish bond yields were on track for their biggest daily drop
"You have new risk mandates and risk appetite tends to be
stronger at the start of the year," said Nordea chief market
strategist Jan Von Gerich.
"The PMI data for some of the peripherals was more
significant than for the euro area as a whole -- In Italy it
shows the recent political uncertainty is not reflected in the
Italian manufacturing activity grew in December at its
quickest pace since June, the Markit/ADACI Purchasing Managers
Index showed on Monday, signalling an acceleration in economic
growth at the end of the year.
INFLATION TEST LOOMS
Most other euro zone bond yields were also lower, with
safe-haven German bonds drawing some support after a New Year's
Day gun attack in Istanbul that killed 39 people.
Germany's benchmark 10-year bond yield fell to an eight-week
low around 0.16 percent, but trading was generally
subdued with several markets closed for the New Year holiday.
Flash euro zone inflation data on Wednesday is shaping up as
a key test of investor sentiment.
A bounce in oil prices and a reassessment of growth
prospects after Donald Trump's White House win have boosted
Euro zone market inflation expectations, measured by the
five-year breakeven forward, are near their
highest levels in more than a year.
Economists polled by Reuters forecast euro zone inflation to
hit the 1 percent year-on-year level in December.
"That would mark a significant change in the overall
inflation environment," said Commerzbank rates strategist
"If the market's perception of the underlying picture
changes, this brings forward the tapering debate significantly
and that is the big risk we are looking out for."
The European Central Bank has not discussed ending its
asset-purchase programme, ECB Executive Board Member Benoit
Coeure told a German newspaper on Friday, though he said that
would have to happen at some point.
Spain's Treasury said it would sell up to 4.75 billion euros
of bonds at an auction on Thursday.
(Editing by Richard Lough)